We Think Tapex (KRX:055490) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tapex Co., Ltd. (KRX:055490) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tapex

What Is Tapex's Debt?

As you can see below, Tapex had ₩14.1b of debt at December 2020, down from ₩15.3b a year prior. But on the other hand it also has ₩34.7b in cash, leading to a ₩20.5b net cash position.

A Look At Tapex's Liabilities

According to the last reported balance sheet, Tapex had liabilities of ₩38.9b due within 12 months, and liabilities of ₩9.32b due beyond 12 months. On the other hand, it had cash of ₩34.7b and ₩16.7b worth of receivables due within a year. So it actually has ₩3.17b more liquid assets than total liabilities.

Having regard to Tapex's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩205.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tapex boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tapex has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tapex's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tapex has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tapex recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Tapex has ₩20.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in ₩12b. So is Tapex's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Tapex you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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